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China: On a FX reserves selling spree – Commerzbank

FXStreet (Delhi) – Research Team at Commerzbank, note that after China had been hoarding foreign reserve assets for years, it has been selling them for a year at accelerating pace in order to support the renminbi which is suffering from massive capital outflows.

Key Quotes

“A decade-long trend has turned. From their peak in mid-2014 through to August 2015, the Peoples’ Bank of China’s (PBoC’s) FX reserves continuously declined – by a total of 11% or $436 billion. Even more disturbing is the fact that the pace of reserve reduction seems to have accelerated recently.”

“This new situation has been triggered by net capital outflows, which have been enabled by continuous financial account liberalization. To prevent crisis-like depreciation episodes, the PBoC will likely have to continue the policy of reserve drainage for quite a while. A reversal of capital-flow liberalization would only be a measure of last resort.”

“The PBoC has lost 11% of its reserves in the past 14 months; in August alone its reserves shrank by 2.6%. This can continue for some time, but if net capital outflows were to continue at their current pace, even the PBoC’s huge reserve portfolio might at some point appear to be insufficient, creating even more motivation for capital outflows.”

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